Apple: Samsung Underwhelms With The Galaxy S7

| About: Apple Inc. (AAPL)

Summary

Samsung unveiled the Galaxy S7 in Barcelona before the start of Mobile World Congress.

The S7 design is almost identical to the S6 on the outside, but features some internal improvements.

Aggressive marketing of the S7 will put a dent in iPhone sales for the March quarter.

Samsung (OTC:SSNLF) unveiled the Galaxy S7 and S7 Edge at a lavish event on Sunday, February 21, just prior to the start of Mobile World Congress in Barcelona. The S7 turned out to be less formidable than many expected. As if in acknowledgment of this, Samsung is throwing in a free Galaxy Gear VR headset with every pre-order. In effect, Samsung has already cut the price of the S7 before it goes on sale on March 11. This price cutting will undoubtedly be effective in the near term, and now we can see the wisdom of Apple's (NASDAQ:AAPL) March quarter guidance.

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Source: Phone Arena

Processor Upgrades

Initial takes have found the S7 design underwhelming. It's very little changed from last year. Samsung has reprised the aluminum and glass case from the S6. While the S7 Edge features a larger screen, the S7 and S6 look almost identical. Apparently, this is an "s" year for Samsung as well as Apple.

Like the iPhone 6s, the S7 changes are mostly under the hood. Samsung has restored the micro-SD card slot, which many Samsung customers missed. Samsung has improved the water resistance of the phone so that it can even be immersed completely in water for up to thirty minutes.

The most important change is the upgraded processor, either the Samsung Exynos 8 or the Qualcomm (NASDAQ:QCOM) Snapdragon 820 (in North America). In some early testing, the S7 equipped with the Exynos 8 improves its Geekbench performance over the previous Samsung Exynos 7420 in the S6.

Here, I'm showing the Snap 820 Geekbench results separately since only the Galaxy S7 with the Exynos 8 processor had been tested as of this writing.

The dual core A9 processor of the iPhone 6s continues to score the best in single core performance, while the effectively quad core Exynos 8 and Qualcomm Snapdragon 820 perform better on multicore.

Based on very limited graphics testing, the graphics performance of the S7 (with Exynos 8) doesn't appear to be improved and lags considerably behind the iPhone 6s A9 processor as well as the new Snapdragon 820.

The presence of the Snap 820 in the North American version of the S7 will pose somewhat tougher competition for Apple. However, I don't see it changing the fundamental dynamics of smartphone upgrades in the North American market. Owners of older Android phones might be tempted by the S7, but probably not any iPhone users.

When more extensive benchmarks become available, such as the test suite that Anandtech uses, we'll probably see iPhone 6s outperforming the Exynos 8 version of the S7 in most tests, as it did the S6 when Anandtech reviewed the 6s back in November. This is because most real world situations as well as benchmarks benefit more from single core performance.

Whether the Snapdragon 820 equipped S7 will best the iPhone 6s is another matter. In Anandtech's review of the Qualcomm development system for the 820, from which I derived the graphics benchmark, the iPhone 6s came out roughly even on CPU tests, while the 820 was ahead in graphics.

It has been pointed out the iPhone performs better on many benchmarks that Anandtech uses, especially ones that are browser and Javascript based, because of Apple's operating system. This isn't a bad thing. It really highlights the advantage Apple has in controlling both the operating system design as well as the processor.

Also the day before the start of MWC, LG announced that its new G5 smartphone would feature the Snap 820 processor. The fact that LG and Samsung will be fighting it out for top dog status in the Android world, with similar or identical processors depending on the market, may actually help Apple, at least in perception. LG and Samsung will probably split market share more evenly, producing some loss of market share by Samsung.

Camera Rollback

The other major change to the S7 was in the main (rear) camera, which was claimed to have considerably better low light capability as well as a faster autofocus system than the iPhone 6s. The focal plane pixel count for the new camera has actually been reduced to 12 Mpixel from the 16 Mpixel of the S6, exactly the same number as the iPhone 6s.

I couldn't help but chuckle over this. After reading innumerable reviews and blog posts dismissing the iPhone 6s camera as inferior for having fewer pixels, I wonder what the reviewers will now say. In fact, the Mpixel count was never a particularly good metric for assessing camera quality.

DXOMark provides very comprehensive testing of smartphone cameras and found that the Galaxy S6 Edge Plus scored only a few points better than the iPhone 6s Plus (87 vs. 84 on DXO's testing scale). I doubt this amounts to a significant difference to consumers, and is certainly not a reasonable basis to claim that iPhone 6s/6s Plus is an inferior smartphone.

Every smartphone maker is a system integrator that has to decide where to put product development resources. Apple has emphasized its custom processor development while it depends on Sony (NYSE:SNE) for its cameras. Much of the decision making regarding cameras is based on packaging constraints. Apple could certainly equip its phones with better cameras, since the Sony Xperia Z5 also has the top score of 87 in DXOMark.

The new camera in the S7 is undoubtedly an improvement, and this will likely elicit a similar improvement in the next generation iPhone 7 camera.

Lagging in VR

Perhaps the one area where Apple is truly lagging Samsung is in VR. To emphasize this fact Mark Zuckerberg of Facebook (NASDAQ:FB) put in an appearance at the event.

Samsung's Gear VR headset, which uses a Galaxy smartphone as the display, was developed in cooperation with Oculus, which FB owns. The Gear VR is actually a very clever device that makes use of the processing power and high resolution display of Samsung's smartphones to provide a very convincing VR experience that doesn't require being tethered to a computer.

Apple has done some hiring in VR, and Tim Cook acknowledged interest in VR during Apple's last earnings conference call. Some virtual reality or augmented reality product is probably in the works at Apple, but there's no telling when it will arrive.

Investor Takeaway

In many respects, the Galaxy S7 represents Samsung playing catch up. In processors, in services such as payments, in operating systems, the S7 represents needed catch up with the iPhone 6s. Samsung seems to be banking on the camera and VR capability of the S7 to put it ahead of the iPhone 6s, along with undercutting the price of the 6s. These moves can all be expected to have some negative effect on iPhone sales in the near term.

Probably, the most significant effect will be in the March quarter, when the initial wave of S7s hits the market. Despite some indication that iPhone sales are slower than anticipated, I expect Apple to make its revenue and gross margin guidance for the March quarter.

Without more extensive testing of the S7, it's difficult to gauge its impact on the June quarter. I'll have a better feel for this once I see some full reviews of the S7, which should come out pretty soon.

When Apple rolls out the iPhone 7 in September, it will be an all new phone, with a new processor, operating system, camera, etc. At that point, I expect iPhone sales to rebound. I remain long Apple and recommend it as a buy.

Disclosure: I am/we are long AAPL.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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